In a rational world, tax avoidance would be a bipartisan issue

By Richard Forbes.Featured image via Ben Nelms, CP.

Parliament is back in session but you would hardly know summer was over from the top of the agenda: Finance Minister Bill Morneau’s tax reform proposal was a hot topic among Canadians when it was first unveiled in August but the Tories – having sensed a hill worth dying on – appear set to carry the issue throughout the fall sitting and beyond if their first day back was any indication.

It’s been a difficult return to the House for the new opposition leader. Scheer, who is fresh from this summer’s barbecue circuit, spent much of this week dancing around blowback from ill-advised remarks made by Gerry Ritz and “Senator” Lynn Beyak – ultimately refusing to boot either from caucus. (One can almost hear the parliamentary pages re-setting the clocks to track the days without incident from Senator Beyak…)

On the offensive, Scheer predictably began the first of the fall sitting’s barbs between him and the prime minister by linking extant tax loopholes to the prosperity of small business owners themselves…

“As Conservatives, we believe in raising people up, not tearing people down,” Scheer told the House (seemingly oblivious to his own party’s record on “raising people up” – tightening Old Age Security and Employment Insurance, as well as cuts to the Canadian International Development Agency, Status of Women Canada, and Aboriginal Affairs.)

Prime Minister Trudeau volleyed back, “[Tories] have been going around the country telling every doctor they meet that they stand with them, that they will defend their right to pay lower taxes than the nurses who work alongside them.”

“We don’t think that’s fair.”

All in all, a feisty exchange, especially so for the leaders’ first day back (which is traditionally more ‘sleepwalk’ than ‘cagefight’.)

At the centre of this heated discussion is the government’s decision to close loopholes related to dividends – which allow incorporated business owners to ‘sprinkle’ their income to family members unaffiliated with their business to avoid paying a higher tax rate, in addition to converting their assets to capital gains to avoid paying the higher combined tax on dividends. For those in a tax bracket above roughly $90K in annual income in Ontario, Quebec, British Columbia, and other provinces and territories, residents can be expected to pay less under the combined marginal tax rate. From there, only half of capital gains are taxable at all, given the capital inclusion rate.

Scheer, seemingly pushed into a corner by Trudeau, appeared unwilling to say whether the Conservatives would even reintroduce the very loopholes that he was defending if they were to form government in the next election. Which begs to question, as Trudeau did himself, whether the Conservatives are pushing the tax reform debate because they believe income-sprinkling is sensible tax policy, or rather, because they believe there are political gains to be had in throwing in their lot with the formidable lobbying campaign afoot pushing back against the tax changes?

Among those groups keeping tax reform on the public agenda is the Canadian Federation of Independent Business (CFIB), Canadian Medical Association (CMA), Canadian Bar Association (CBA), and the Ontario Medical Association (OMA). Not to be out done, the Canadian Taxpayers Federation even flew a banner across Ottawa’s skies in dramatic fashion with a message to parliament: “No Small Biz Tax Hike.”

Proponents of the tax loopholes have been very successful in shrouding the debate with romantic retellings – “the hardworking small business owner,” “the mom and pop shop owner,” “your local doctor” – never stopping to question the general conditions that one must meet before the tax loopholes become relevant to them (i.e., making more than approximately a $100K annually and maxing out their TFSAs and RRSPs), nor stopping to question the practice of income sprinkling itself. Income-sprinkling – an irrational way to deliver tax relief to small businesses – doesn’t apply to most businesses and to those that make use of it, the scheme applies to them only because of how many children the owner has and the specific level of income they maintain.

[I know it’s a T1 form, not a T2. Shush, you.] Maclean’scites the Finance Department’s findings that 50,000 families are engaged in income-sprinkling (Photo: Graeme Roy, CP.)As if caught in a dream, those shrilling for these tax avoidance schemes seem blissfully unaware of the plotholes and gaps in logic they’ve waxed over.

In the last federal election, the Liberals made a rather bold push to rollback income-splitting and raise taxes on the wealthiest; it’s from that wider call for tax reform that these latest rule changes have followed. The goal is the same though: protecting the progressivity of the Canadian tax system from loopholes and avoidance schemes that allow the wealthiest Canadians – especially those with a certain family structure – to pay less than expected of them. Schemes like income-sprinkling undermine the integrity of the tax system; like holes in a canoe (we’ve hit pure Canadiana here folks), the porousness of the system was not intentional. Income-sprinkling is a crafty exploitation of the tax rules, nothing more, nothing less: loopholes only available to those who can afford to access them, which raise the tax burden on everyone else in the country.

In a rational world, tax avoidance would be a bipartisan issue. Gaps in tax rules undermine the fiscal sustainability of government spending, privileging these unintentional gaps to please interest groups and their members ought to be a non-starter when an inefficient tax system means higher rates on personal income, capital gains and businesses to pay for government spending and services. The federal government’s coffers are projecting to reap an additional $250M in revenue from closing the three loopholes at play in this latest reform package alone.

But whether it’s sensible to protect the dividends some of Canada’s wealthiest are shielding from higher tax brackets or not, they are going to try to make an impassioned (and intellectually dishonest) case that we should. But we shouldn’t. It’s not our responsibility as a country to maintain every loophole saving them money that their tax accountants have discovered over the years. Rather, our first responsibility in this particular case should be to the equitable financing of our own government: maintaining a tax system that is fair to Canadians, not riddled with exceptions for the richest ‘nuclear’ families in business among us – a tax system that is sound, efficient, and progressive.

Richard Forbes studied Political Science and Philosophy at the University of Waterloo. Winner of the Peter Woolstencroft Prize in Canadian Politics (2015).

When asked what ‘one does exactly’ with said degree, he laughs and politely declines to answer. A perfect night for him involves a cup of Lady Grey, writing and a re-run of Yes Minister.